life insurance policy

Demystifying the Secondary Marketplace for an Unneeded Life Insurance Policy

Three characteristics of the life settlement industry that may reassure advisors

Four out of 10 U.S. financial advisors have only a limited familiarity with life settlements or are entirely unfamiliar with these transactions, according to a 2015 survey published by WealthManagement.com. Although anecdotal evidence suggests this advisor awareness is increasing, there’s no question that many estate-planning attorneys and other advisors in a position to counsel clients on how to manage their assets are unfamiliar or misinformed about life settlement transactions.

In this column and more to follow, we’re trying to shatter some of the common myths in the financial planning profession that lead to these false perceptions. Here’s the one we’d like to tackle today: “The life settlement industry is an unregulated marketplace for selling life insurance on the secondary market.”

It’s fair to say that the early days of the life settlement industry were a bit like the Wild Wild West, but that’s typically the case with any industry in its infancy that’s growing rapidly. Those days are over. This is now a mature industry with three major characteristics that any attorney or financial advisor wants to see in place for the protection of their clients’ assets.

Safe

The place to start is with empirical results. The Deal recently investigated consumer complaints filed in the past four years with state regulators regarding life settlement transactions by conducting their own independent review of The National Association of Insurance Commissioners’ database and speaking to individual state regulators. Their conclusion was that “there are only three consumer complaints” nationwide regarding life settlement transactions and “at least two of them don't involve life settlement market players.” In fact, the one consumer complaint on record regarding life settlement transactions was the result of a sales agent who failed to follow the proper licensing requirements, paid a fine and was reinstated.

Contrast this extraordinary record of serving consumers with the data regarding the life insurance industry, for example. According to the National Association of Insurance Commissioner’s Consumer Information Resource, there are tens of thousands of consumer complaints on file, for reasons ranging from delays in claim handling to unsatisfactory policyholder service. The ethical and regulatory safeguards in place have served to protect the integrity of the U.S. life settlements marketplace. 

Ethical

The official professional association for the U.S. life settlements industry is the Life Insurance Settlement Association (LISA), over which I preside. LISA’s Board of Directors enforces a strict code of ethical conduct that protects consumers, their trusted advisors and the various participants in life settlement transactions.

For example, LISA requires that all members of the association agree to abide by our Code of Ethics and Standards of Professional Conduct. These ethical standards are fundamental to the values of LISA, and our members understand they’re critical to maintaining the public’s trust in the life settlement markets and in the life settlement industry. All LISA members must abide by these detailed ethical standards, and violations may result in disciplinary sanctions by LISA, including suspension or revocation of membership.

Regulated

In 1911, the U.S. Supreme Court issued a decision in Grigsby v. Russell, 222 U.S. 149 (1911), which recognized the rights of the life insurance policy owners to transfer ownership of their life insurance policies to a third party and paved the way for the birth of the life settlement industry in the United States. This ruling provided the legal foundation for the U.S. life settlements industry. As of 2016, 42 states and the territory of Puerto Rico now regulate life settlements, affording approximately 90 percent of the United States population protection under comprehensive life settlement laws and regulations.

Transparency is a key part of life settlement regulations around the nation. Recent laws call for full disclosure of how much compensation is earned from a transaction, as well as communication of all offers, counteroffers and rejections throughout the transaction process. In addition, most states require that consumers are provided with information about alternatives to settlements, risks related to taxation and government assistance and the licensing of life settlement brokers and providers. For the vast majority of states, a life settlement transaction is regulated by each state’s Department of Insurance, which typically requires the buyer (that is, life settlement provider) of the life insurance policy to be licensed by that state.

Important Option

Millions of American seniors are nervous about their retirement expenses and are searching for financial security. These retirees have a right to know that a life settlement is an important option to consider as an alternative to lapsing or surrendering their life insurance policies. As their trusted advisor, you have a right to know that life settlements are safe, ethical and highly regulated transactions.

 

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